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Opinion National Interest PoV 50-Word Edit

ThePrint On Camera Videos In Pictures

Society & Culture Around Town Book Excerpts Vigyapanti The Dating Story

More Judiciary Education YourTurn Work With Us Campus Voice

India must allow citizens to invest beyond its borders. It’s risk management, not luxury

The financialisation of Indian household savings is one of the most important economic shifts of the past decade. But financialisation without international diversification creates fragile balance sheets.

The average Indian investor today faces high unpredictability on multiple fronts: the United States and Israel’s war on Iran, the US yo-yoing on its trade policy, the volatility of the Indian rupee, and AI-linked technological disruptions. Such volatility risks pushing households back toward gold and real estate, just as India’s financialisation of savings begins to gather momentum. How should policy respond to this threat?

Indian households and institutional custodians of Indian savings, such as pension and provident funds, should be encouraged to diversify their portfolio globally. While the gains from global diversification have been generally shrinking, the war on Iran shows that international diversification also helps shrink war-linked losses. Indian policymakers’ role, therefore, is to reverse their decades-old anti-diversification stance and remove the frictions associated with international diversification. 

Gains from diversification

Assets distributed across different countries and regions are less correlated than those concentrated in the same country and region—they tend not to move in the same direction. A globally diversified portfolio acts as natural insurance against country-level or regional stocks.

However, the gains from international diversification have been reducing as the world gets increasingly integrated. These gains depend on low correlations between foreign and domestic stock returns. The financial econometrics literature since the 1990s suggests that returns on international securities have become more correlated over time due to the integration of financial markets.

In sum, the gains exist, but are getting thinner.

Also read: What India can learn from the US-Israel war on Iran

Diversification pays, except during war

Diversification benefits often shrink during wars because global markets react simultaneously to geopolitical shocks. However, the extent of the........

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